USD/JPY attempts recovery from 136.60 despite risk-on mood, US CPI hogs limelight

The USD/JPY pair has attempted a rebound move around 136.60 in the Tokyo session. The asset was trading sideways earlier but is now aiming to deliver gains despite an upbeat market mood. The US Dollar Index (DXY) is trading below the key resistance level of 105.00 and is likely to remain volatile as safe-haven assets lose favor.

Meanwhile, S&P500 futures are displaying marginal weakness in early Asia, portraying cautiousness ahead of critical triggers. However, the overall sentiment is still bullish and may keep demand solid in the risk-sensitive assets. The 10-year US Treasury yields are holding their gains above 3.48%.

As a result of the hawkish policy outlook, investors have favored cheering an anticipated slowdown in the Federal Reserve's (Fed's) interest rate hike pace over fears of a U.S. recession. No doubt, the interest rate peak guidance is expected to remain hawkish citing recent development in employment generation and robust demand for the service sector.

Analysts at Danske Bank predict a further raise in interest rates by 50 basis points (bps) and a hawkish statement from Fed chair Jerome Powell for CY2023. Therefore, the culture of 75 bps rate increases is likely to end. In addition, the neutral rate is anticipated to be between 5.00 and 5.25%.

In addition, US Consumer Price Index (CPI) data will continue to be the primary focus. The headline CPI is anticipated to remain constant at 7.7%, although the core CPI may inching upwards to 6.4%.

On the Tokyo front, consecutive declines in Gross Domestic Product (GDP) are having an effect on the Japanese yen. This has increased the risk of a further decline in inflation, as a contraction in economic activity indicates a decrease in household demand, which is essential for boosting inflation. There is a strong likelihood that the Bank of Japan (BOJ) will continue to release additional stimulus to improve economic prospects.